Eurozone budget deficits fall under new measure

PaulHannon

A change in the way the European Union measures gross domestic product has left governments with slightly smaller deficits and debts, according to figures released by bloc's statistics agency Tuesday.

Based on the newly adopted European System of Accounts 2010 (ESA 2010) methodology, Eurostat now calculates the gap between what the 18 eurozone governments spent and what they raised in revenue during 2013 was 2.9% of GDP, down from the estimate of 3.1% using the earlier, ESA 95 methodology.

Similarly, government debts are now calculated to total 90.9% of GDP, below the 92.7% they would have been equivalent to under the old methodology.

ESA 2010 is intended to give a more accurate picture of what gets produced, spent and invested within the 28-country bloc.

The most significant change is that spending on research and development--whether by companies or the government--will be counted as an investment that creates value, or assets, for the future, just like spending on new machinery or infrastructure. Previously, this was recorded as "intermediate consumption" meaning it was deemed to be consumed at the end of each year or quarter.

Another boost to GDP figures will come from a similar change in the treatment of military expenditure, which will also be viewed as an investment for the future.

Among ESA 2010's early accomplishments has been turning what we thought was a second-quarter stagnation into three months of 0.1% growth.

The new methodology doesn't change the size of the economy, or what is produced and consumed in a given period. It simply changes the commonly agreed way of measuring that activity.

Where that does have an impact is in the calculation of deficit and debt levels for the purposes of applying the EU's budgetary rules. But on the evidence of the figures released by Eurostat on Monday, it is likely to have very little impact.

The French government is proposing a 2015 budget that would have a larger deficit than the 3% of GDP that the EU's rules ostensibly allow. Under the new methodology, its 2013 deficit was 4.1% of GDP, just a 10th of a percentage point lower than under the old methodology.

In terms of the budget deficit, Ireland is the greatest beneficiary of the new rules, seeing its 2013 deficit reduced to 5.7% of GDP, 1.5 percentage points lower than under ESA 95. In terms of government debt relative to output, Cyprus was most favored, seeing a fall of 9.5 percentage points.

By contrast, Croatia saw its government debt relative to GDP surge by 8.6 percentage points, while Lithuania saw its budget deficit rise by half a percentage point.

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